A Bear Market Can Be a Glass Half-Full

Is the glass half-full or half-empty? The question is usually asked to gauge a given respondent’s relative optimism (“It’s half-full, of course!”) or pessimism (“Half-empty, naturally…”).

It’s the same glass. Our reaction to its state is a tell on perspective.

Naturally, there are plenty of jokes in there, as well. An engineer sees the glass as 50% efficient, an accountant sees the water budget as half-spent, an economist sees a glass twice as big as it needs to be, etc.

What about the investor? Well, here is where perspective really is the key.

An investor who expects to sell their holdings for cash in the immediate future, say to fund a wedding or make a payment on a home, sees a total disaster. Half the money is gone!

Likewise, an investor on the cusp of retirement sees years of effort wiped away. Now I can’t leave my job for at least another year!

The younger investor, however, sees an amazing opportunity. Stocks are cheaper than they’ve been in years. Time to buy!

Even a middle-age investor, someone with five to 10 years of work ahead, sees a silver lining. Dividends continue to roll in and get reinvested at much better prices, and new contributions buy more than before!

None of these people are optimistic or pessimistic. Rather, they are realistic. Their feelings about their financial status is directly affected by the value of their investment holdings, day by day.

A powerful way to avoid this emotional trap is to automate your investment process.

Typically, this is done by making a fixed percentage contribution to a 401(k) via your paycheck. A hundred bucks or so out of your pay might not even be missed, and in many cases you can ask your company to up the percentage over time.

At the end of a year, however, all those contributions add up to thousands set aside for your future.

The second step of automating is to own an appropriately diversified low-cost investment fund.

The right proportion

By investing automatically you always buy, regardless of market conditions. When markets are high you get fewer shares and when markets drop you get more.

As you get older, it is smart to review your investment progress and goals from time to time. Some folks automate even further by using target-date investment funds.

These funds, often found in 401(k) plans, adjust your portfolio to lower-risk holdings over time. That usually means owning more bonds and less stock as you near your ideal retirement age.

Done that way, you get the advantage of buying more stock when you are young and have time for markets to recover, then owning less stock as you get closer to needing that money to replace your income.

Essentially, it’s a glass that is always filled in the right proportion for your needs, and one that is far less likely to provoke an existential crisis along the way.

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